Perry Acts To Prevent Predatory Pricing From Pushing Nuclear And Coal Competition Out Of Market. FERC To Value Resiliency And Pipeline Independence

One of the most sweeping changes to the U.S. electricity supply market in the past two decades may be implemented before the coming winter heating season. The brief bottom line of the change is that eligible power sources will be able to participate in a details-to-be-determined rate structure that allows the owner to recover its “fully allocated costs” plus a “fair return on equity.”

Eligible grid reliability and resiliency resource is any resource that:

is an electric generation resource physically located within a Commission-approved independent system operator or regional transmission organization;

is able to provide essential energy and ancillary reliability services, including but not limited to voltage support, frequency services, operating reserves, and reactive power;

has a 90-day fuel supply on site enabling it to operate during an emergency, extreme weather conditions, or a natural or man-made disaster;

is compliant with all applicable federal, state, and local environmental laws, rules, and regulations; and

is not subject to cost of service rate regulation by any state or local regulatory authority

All licensed nuclear power plants and a significant portion of existing coal plants can meet those requirements today.

Some coal plants cannot store a 90-day fuel supply due to space or environmental limitations. There are also coal plants that cannot meet certain laws, rules or regulations that will go into effect in the near future without investing in new systems.

Several nuclear plants may soon be unable to meet rules associated with once through cooling water discharges without making significant capital investments.

How Did The Market Get Notified Of The Change?

Energy Secretary Rick Perry issued a letter to FERC on Friday with the following subject line:

“It is the policy of this Administration to support an “all of the above” approach to energy development and use. We need to properly recognize the value of each resource, being mindful of its role in our national defense, economic security, and pursuit of environmental outcomes. In particular, we must account for the value of on-site fuel storage capability. Moreover, because of the long lead time to secure and maintain these resources, we must also ensure that the technical expertise and materials are readily available. If, for example, we lose our educated workforce or no longer have the ability to build and operate our baseload plants because of short-sighted policies, it will not only weaken our workforce, but with threaten our energy dominance and national security.

“On behalf of the American people, I look forward to your immediate action on the pressing issue of protecting the resiliency of the electric grid.”

Along with his letter, Secretary Perry enclosed a Notice of Proposed Rulemaking (NOPR) that directs the Commission to either take final action within 60 days after publication of the NOPR in the Federal Register (which has not yet occurred) or to issue the proposed rule as an interim final rule. Any rules included in the final action will go into effect within 30 days after publication.

The Summary section of the NOPR includes statements with legal justification for the FERC’s authority to issue the proposed rule without an Environmental Assessment or an Environmental Impact Statement.

It also provides an analysis concluding that the proposed rule does not have any significant economic impact on small entities and thus does not need to meet certain description and analysis requirements of the Regulatory Flexibility Act of 1980 (RFA).

“The recent Polar Vortex, as well as the devastation from Superstorm Sandy and Hurricanes Harvey, Irma, and Maria reinforces the urgency that the Commission must act now. Moreover, the Commission should take action before the winter heating season begins so as to prevent the potential failure of the grid from the loss of fuel-secure generation–as almost happened during the 2014 Polar Vortex.

“As outlined above, the Commission has developed a vast record of comments, hearings, and technical conferences on price formation matters, but has not done enough to address the crisis at hand.”

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Reactions To Proposed Rule And Implementation Timetable

“This remarkable action by Secretary Perry will help ensure that America’s baseload nuclear fleet will remain a strategic asset that contributes to energy security, reliability, economic growth and environmental protection, while advancing American influence abroad.”

She went on to describe how short term, energy only markets have failed to compensate “everything that is important to our electricity system.”

Her conclusion is worth highlighting.

“This timely move is especially needed for nuclear plants because once they close, they close forever. The clear benefits they provide in terms of jobs, economic growth and environmental protection disappear too, thus the need for this decisive action now. The Secretary’s action makes clear that for FERC and the independent system operators that this must be their top priority.”

In a press statement released Friday by the American Council On Renewable Energy (ACORE), Todd Foley, ACORE senior Vice President for policy and government affairs, expressed concern about the way that the rule will “prop up plants that have not been shown to be needed.”

He also claimed that “renewable energy technologies provide many resiliency and reliability attributes to the grid, including flexibility, dispatchability, and other essential services.”

CHARLOTTE AMALIE, US VIRGIN ISLANDS – SEPTEMBER 17: Hurricane Irma destroyed almost all of the 16,748 panels in this solar farm September 17, 2017 in Charlotte Amalie, St Thomas, The U.S. Virgin Islands. Hurricane Irma slammed into the Leeward Islands on September 6 as a Category 5 storm, killing four and causing major damage on the islands of St. John and St. Thomas. (Photo by Chip Somodevilla/Getty Images,)

The American Petroleum Institute (API) also expressed concern. “…we are concerned the agency has mischaracterized the lessons learned from past weather-related events and appears to suggest that additional regulation is the answer where markets have already proven the ability to greatly benefit consumers and give our electric system the flexibility needed to meet constantly, and often rapidly changing electricity demands.”

(It’s worth noting that one of the actions taken by ISO New England following the near disaster of the 2014 Polar Vortex was to implement a winter fuel reliability program in which customers paid dual fuel capable natural gas plants to store additional distillate fuel on site for use when natural gas was unavailable at any price due to pipeline capacity constraints.)

R Street, an organization that describes its mission as “to engage in policy research and outreach to promote free markets and limited, effective government” expressed dismay and labeled the proposal as an “arbitrary backdoor subsidy to coal and nuclear that risks undermining electrical competition throughout the United States.”

That piece also dismissed the importance of electric system reliability. “Brief voltage reductions and even rotating 30-minute blackouts are not catastrophic, by any stretch.”

My Conclusion

Free market purists like R Street may have complained a bit about the hand on the scale in favor of renewable energy resources, but their expressed faith in the market decision making process is triggered by the idea that coal and nuclear plants might not be forced to retire.

As a lifelong fan of reliable electricity who has visited places where brownouts and rolling blackouts are an accepted fact of life, I do not support the Enron-conceived notion that electricity is just another tradable commodity with opportunities for fabulous rates of return in certain conditions.

Blackouts and brownouts impose a far greater cost on the overall economy than most people realize. Electricity is too important to be left to the vagaries of short term markets, especially since the markets have already been tipped heavily in favor of unreliables and natural gas.

Wind and solar power advocates are either confused or disingenuous when claiming that their power sources, which – by definition – cannot be well protected from the weather, are reliable and provide resilience.

The American Petroleum Institute and its partners in the natural gas industry are mad because their long running price war against coal and nuclear may be interrupted before it achieves its desired objective of driving out enough of its competitors to give it scarcity pricing power.

The rule makes sense. The urgency is justified. I fully expect that there will be numerous interests that will seek delays because those will help them achieve their objective of forcing permanent plant closures.

It is too bad the rule wasn’t implemented in time to save valuable, emission-free, fuel-secure assets like Vermont Yankee, Kewaunee, and Ft. Calhoun. Fortunately, it looks like it might have been issued in time to save a couple of dozen other nuclear plants that are at risk of prematurely closing in the next five years.

Meredith Angwin, who worked diligently to Save Vermont Yankee, has published a thoughtful piece explaining why it’s important for FERC to take prompt action to ensure that the grid power that enables modern society to function remains both reliable and affordable.

Note: A version of the above was first published on Forbs.com. It has been revised and republished here with permission.

Reader Interactions

Comments

Lauding such policies is fine, as long as one looks at the overall effect the trump administration has on energy policies and the environment. Ms Korsnick lauds this policy, in part, because of its environmental effect..

It’s incorrect to use the term “deregulation” to describe the policy efforts underway, especially in the context of a Grid Resiliency Pricing Rule. The focus of regulations may be different than they were in previous administrations, but I haven’t heard of any proposals that aim to eliminate all rules.

Many of the (hyperventilating) reactions to this proposed policy, shown in the Utility Dive article below, are (AFAIK) record-breaking in terms of hypocrisy.

Small amounts of subsidy or support for coal and nuclear plants will “blow up”, “unravel” and “destroy” the wholesale power market?? And yet, far larger market interventions on renewables behalf, including not just heavy subsidies but outright mandates for use are not a problem?? If these supports, for existing coal and nuclear plants, would “destroy the market”, and competition, then how could it be that CA’s 50% (soon to be 100%??) mandate for intermittent renewable energy would not also destroy the market, to an even greater extent? CA’s mandates for intermittent generation will (and already has) have a huge impact on the grid of the entire Western US. Competition??

Whereas coal and nuclear supports may affect the competition somewhat, these RPS policies have called the competition off entirely, and declared renewables the winner.

Why is nobody asking about (or suing) over this? If coal/nuclear supports like this can be blocked, for the reasons given, then why can’t RPS policies be blocked, by the courts? Fair competition matters for all sources except renewables?

In the Utility Dive article, all the “esteemed experts” just repeatedly made those assertions about how the market would be “destroyed” w/o ever giving any explanation as to why or how. Given that, and the utter incoherency (and hypocrisy) of their statements, I can only conclude that they are not arguing in good faith, and that those “experts” are all in the pocket of the oil/gas industry. That is their only motivation.

Despite the hypocrisy of the negative reactions to this policy, I have concerns as well. For starters is the obvious, that it would support coal plants and keep them open, coal being the worst of all sources in terms of public health and the environment.

Also, I initially thought that they were talking about giving subsidies, to reflect coal and nuclear’s grid reliability benefits. Perhaps ~1 cent/kW-hr. I believe in policies like that. However, if I understand Rod correctly, qualifying plants would be given whatever it takes to cover their costs, plus a profit. Thus, they would stay open no matter what they cost? I don’t agree with this. Like anything else, grid reliability benefits are of a tangible, but finite, value, justifying a fixed (limited) subsidy.

One of the reasons this is problematic is that it would render coal plants immune to any other policy inputs that would otherwise act to phase coal out, or at least make the market reflect its environmental impacts. A perfect example is the carbon fees proposed by CCL and others. Under this (DOE) policy, would coal plants be unaffected by a CO2 fee or tax, because they would just get those costs covered by the ratepayers? Thus, there would be no way to favor nuclear (or even gas) over coal, to reflect environmental attributes? In other words, this reliability policy would trump all other policies, such as those concerned with environmental impacts.

Am I understanding all this correctly? What if there are multiple (more than enough) generators that can meet the grid reliability requirements? How would the policy decide which ones remain open? If all costs are covered for all facilities that meet the requirement, how would the market decide? Again, this all argues for some kind of subsidy, not having all costs covered.

Personally, I think these grid reliability arguments are strained. The fact is that gas plants can maintain grid reliability, even with some significant amount of renewables penetration. What’s frustrating, for me anyway, is that people feel the need to make such (weak) arguments as opposed to making the real arguments in favor of nuclear (not coal), i.e., its environmental benefits. I suppose they think they need to come up with other arguments because Trump and the GOP are in charge.

BTW, critics have pointed out that many gas plants can just start storing 90 days worth of oil on site, thus allowing them to qualify.

Personally, I think these grid reliability arguments are strained. The fact is that gas plants can maintain grid reliability, even with some significant amount of renewables penetration.

Gas plants depend on just in time fuel delivery. They can contribute to grid reliability as long as no one attacks their fuel source delivery system.

As a career submariner who has a deep interest in history, I can testify that one great way to put stress on an enemy nation is to attack their fuel delivery systems.

In places like Texas, with a profusion of gas sources and pipelines, this is not a major concern of mine. In Florida, California and New England, however, attacks on one or two key pipelines can cause a common mode failure in dozens to hundreds of power generation sources.

I’d love to see a system proposal with rough cost estimates that effectively stores 90 days worth of gas. It’s possible with large underground reservoirs or maybe LNG, but it wouldn’t be “cheap gas” anymore.

I’m with you on the risk of compensating all units with individually determined cost of service plus reasonable profit prices.

One potential solution would be to determine a fair floor price for all units that can meet the established standards. Units that are well designed, maintained and managed would become better profit makers than those that are less competitive, but no sources could be unfairly driven out of the market by competitors that can afford to give away their products for a finite period of time.

As far as I can tell, the words “predatory pricing” and “dumping” have not been used often enough to describe the behavior of certain market participants whose fixed costs have been covered by subsidies, mandates and other preferential treatment. We also need to keep reminding interested listeners that the electricity market has been destabilized by rapidly building more capacity than needed during a period when there was already insufficient demand for the product.

Another consideration is the planned export of large quantities of natural gas as part of an economic warfare strategy against Russia. Because hydraulic fracturing rapidly depletes wells, new drilling must be continuously expanded. Both the supply and demand ends of the string will be extremely tight and prices could show extreme volatility on the upside in a few years – just when some of the currently unprofitable nuclear merchant plants are scheduled for shutdown.